In an industry full of misconceptions, misinformation, and misinterpretations, jumbo loans might be the most misunderstood mortgage of all. These loans, which are by definition larger than the limits set by conventional loans, can vary widely from lender to lender, leading to lots of confusion.
This confusion has, in many cases, become myth. But we’d like to break the myths and share some reality.
When you understand the truth about jumbo loans, you’ll see that they are actually more attainable than you thought…
Jumbo Loan Myths vs Jumbo Loan Reality
Jumbo Loan Myth: All Jumbo Loans Require 20% Down
Jumbo Loan Reality: Jumbo Loans Can Be Used with as Little as 5% Down
Because of the connection (often overstated) between jumbo loans and high-end luxury houses, many people assume that you automatically need a 20% downpayment for your purchase. This is not the case, as you can actually utilize a jumbo loan with as little as 5% down in certain situations.
With these loans, you can buy a home with a purchase price up to $2,105,263 with as little as 5% down on the purchase. If you can bring a 10% downpayment, you can purchase a home with a purchase price as high as $3,333,333.
Let’s simplify the math to help you understand the difference between downpayments of 5% and 20%. Suppose you have a purchase price of exactly $2 million. At 5%, the downpayment would be $100,000. This is certainly a large number, but if a 20% downpayment were required, you would need $400,000!
Unfortunately, this myth keeps people from utilizing jumbo loans, which they assume are out of reach because of giant (and mythical) downpayment requirements.
Jumbo Loan Myth: A 700 Credit Score is Required for a Jumbo Loan
The Reality: You can use a Jumbo Loan with a 660 Credit Score
Another myth that keeps people from using jumbo loans when they may be able to qualify is the assumption that a high credit score is required. There is a common myth that to use a jumbo loan, you need a credit score of 700; some may assume that the credit score needs to be even higher than that.
But this is simply not the case, as many buyers will qualify for a jumbo loan with a credit score as low as 660.
While 660 may not be considered a low credit score, it’s not exactly a high score either. Generally speaking, this is a good credit score that will allow people to qualify for a range of lending options.
If your credit score is lower than 660, you may not be able to qualify for a jumbo loan. However, there are lending options that could fit your needs for purchase price, so it never hurts to speak with a lending agent, explain your purchasing goals, and see if any options are available.
Jumbo Loan Myth: 12 Months of Reserves are Required
Jumbo Loan Reality: High Borrower Reserves are Not Always Required
If you don’t have a significant amount of cash sitting in the bank, cash that can be used to pay the mortgage for a full year in case of a financial emergency, don’t bother applying for a jumbo loan. This is the myth, but it’s far from the reality.
There is an assumption that you will need 12 months worth of cash reserves to qualify for a jumbo loan. Cash reserves are simply funds held in an account that can be used to pay the mortgage in the event of financial troubles. They are calculated by monthly payments. For example, if the monthly mortgage payment is $4,000, and you need six months of cash reserves, you would need a total of $24,000 in reserves. ($4,000 x 6 = $24,000)
For jumbo loans, the monthly payment can be even higher; you could pay as much as $10,000 a month on your loan. Imagine if you were required to keep 12 months of reserve cash; this would equal $120,000 that you need to keep in savings.
But there are actually jumbo loan programs that do not require cash reserves whatsoever, and there are options that allow you to use stocks, business funds, or retirement accounts as your cash reserve. Even gift funds can be used if the gift comes from a qualifying family member. This could be the difference between mortgage qualification and rejection for many borrowers.
Jumbo Loan Myth: If your Debt-to-Income Ratio is Above 43%, You Can’t Use a Jumbo Loan
Jumbo Loan Reality: 50% DTI Could Still Qualify for Certain Jumbo Loans
Your debt-to-income ratio, commonly called the “DTI,” is one of the most important factors for your loan qualification. Lenders, for obvious reasons, want to know that you can afford a loan payment, so while they are concerned with the total amount of debt that you have, they are more concerned with your total monthly debt payments. In other words, they may not be overly concerned that you have, say, $200,000 in total debts obligations, but are more concerned that you pay $7,000 a month towards those debts.
DTI is essentially a statement of your monthly debt payments compared to your total monthly income. If you have $2,500 in debt payments, and you earn $10,000 a month, your DTI is 25%.
Generally, lenders prefer a low DTI. The higher a DTI climbs, the more risk, statistically speaking, is involved in the loan. As the ratio approaches 50%, the statistical chances of a loan default climb significantly. Borrowers with DTIs above 50% are far more likely to default on a loan, so lenders are hesitant to issue loans if the debt-to-income is above this level.
Some borrowers assume that if the DTI is above 43%, a jumbo loan is off limits. The truth is that you can, in certain situations, get a jumbo loan with a DTI as high as 50%.
Also, there are lenders who can use an aggressive approach to income calculation. This means that your qualifying income could be increased, which lowers the DTI ratio.
Get a Full Analysis on All Available Jumbo Loans
If you are seeking a jumbo loan, don’t believe the myths. Learn the reality from a lending agent who has access to a wide variety of loan options. Only a full analysis of all available loan products can deliver the best jumbo loan for your needs.
Contact our staff and see if there is a jumbo loan that would fit your unique situation. With access to the FastTrack program, we can help you find the right loan quickly!
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Chad and The Chad Baker team really helped me from start to finish with my loan process. They were extremely responsive and provided me updates on a daily basis. I had a few personal issues that they helped me work through so I could get the best loan program and best rate. Very knowledgeable about the industry, rates and trends.I HIGHLY recommend Chad and his team. I’m happy to offer a reference upon request. Please ask Chad for my contact information.”
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